It's great to see everybody here today in this full room, and I want to welcome you to this workshop. This is summertime, so it must be a time for sequels, so we have version two of the workshop here in Cleveland.
Before I start, I have just a few quick comments I want to make about the workshop and about manufacturing before we launch into the meat of the workshop here.
Let me add my thanks to Susan and Ray and Bud for hosting us here and having this great workshop. I also want to add my thanks to all of you for taking time right after a busy holiday weekend and a heat wave to come join us today to let us pick your brains about this National Network for Manufacturing Innovation.
We're also going to hear shortly from Senator Sherrod Brown who has been a real lead in the Senate on manufacturing at a national level and is playing a key role in this effort as well, since it will require legislation to be stood up.
Jason talked about the economic argument, if you will, the economic rebuttal to why manufacturing matters. And for many of you in this room, it's probably similar to my experience now almost 20 years at NIST. We've always believed that manufacturing played a central role to the economy. We've always understood the deep intertwining between what happened in the world of manufacturing and what happened in research and development. But we are clearly in the middle of a renaissance in that understanding. Certainly from my personal perspective, the discussion around manufacturing is as strong and robust as I've seen it in my nearly 20 years of federal government. And I think for all of us, this signals that a window of opportunity is opened. And I think the challenge before us is how do we move decisively through that window and do something that really matters to the country?
One of the traits I think we have as human beings as we start to understand something, is to try to break it into its constituent parts. We like to understand things by breaking things down. I think back to my early education in biology; it was all about the classification of different living systems. But what I want to talk about today is putting those parts back together. Because if there's a central theme to what we're talking about, it's the integration—manufacturing doesn't stand alone within the economy, it's a critical part of a broad ecosystem that makes the economy work. Saying that manufacturing is important is not the same thing as saying everybody in the United States needs to be working in manufacturing, no more than saying agriculture is important means everybody should be a farmer. That's clearly not the case.
Let me take an example: manufacturing and services. These are two parts of the economy that are often contrasted with each other. In fact, part of the lore in the past decade was we don't need to worry about manufacturing because the U.S. is going to be a service-based economy. But in fact, manufacturing plays a critical role in providing services.
Here's the telling statistic. In a June article in the Survey of Current Business, manufacturing firms represent the second largest exporter of services, just behind finance and insurance. Each of those two sectors accounted for a quarter of total U.S. exports. And in 2008, the manufacturing sector registered a $26 billion trade surplus in services. That's $20 billion more than the finance and insurance industries.
Manufacturing plays a key role in the fabric of our economy. That's the take-home message. Or as Gene Sperling, the president's senior economic advisor, said: "The manufacturing sector punches above its weight."
When the president laid out from the very beginning of his administration that innovation was the centerpiece of our economic growth strategy—a position well-supported by a lot of data, that most of our economic growth as a country since the end of the second World War has, in fact, been attributable to innovation, new products, new services, and the growth and activity that came from that—those words, that focus of the president had consequences.
Our job has been now to look at how do we take a look at the federal programs and make sure that they're supportive of this idea that promoting innovation, all the way from ideas in our research laboratories to the markets, can bear fruit.
The other reason manufacturing has become central to the discussion recently is because not all the indicators are positive. We are also in a vastly more competitive global environment. Other countries have realized the same thing. In fact, other nations are using our approach to improve their capacity to compete against us.
The United States, as a result of both these shifting global trends and perhaps due to some complacency on our part, has seen some of its rankings where we enjoyed world leadership for many decades begin to slip. The United States has slipped below Germany, Korea, and Japan in the ranking of R&D intensity—that's R&D spending as a fraction of GDP in the manufacturing sector. This is a critical indicator of future innovative capacity. In fact, today, the U.S. has slipped to eighth in terms of R&D expenditure as a percentage of GDP. We rank 11th in patents per hundred thousand people, right behind Luxembourg. The Organization for Economic Cooperation and Development has ranked its 31 member nations according to the fraction of total manufacturing value-add that is classified as high-tech or medium-to-high-tech, and the United States is a share of less than 50 percent, placing us in 13th position, right behind the Czech Republic. Indicators of diminishing U.S. innovation performance also include our negative trade balance in advanced technology, a deficit that reached $99 billion last year—a fourth of our total trade deficit in manufactured goods. And, of course, there is the disturbing fact that many of the advanced technology products we import today are the descendants of our own research activities here in the United States.
In fact, many countries, realizing the deep dependency between manufacturing and research, use that card against us. So, a developing country, a common path to developing research infrastructure is to start with manufacturing. Take their comparative advantage and relatively cheap labor, provide a foot in the door in the manufacturing base, and then basically, work their way up the food chain into higher and higher value-add activities until their building out research capability. They have understood in ways that sometimes we forget that the act of making and the act of innovating are dependent on each other.
In terms of this integration, manufacturing is a critical part of our economy, and it stands to reason then that our approach has to be equally integrative. This is not going to be addressed with a single program. This is not a silver-bullet-type problem. This is a chain-of-performance problem, and our overall performance is going to be as strong as the weakest link allows us to move. And this actually poses an interesting challenge for all of us because it means we don't have the luxury of trying to find the one thing we need to focus on, we have to actually look at all of the balls that are in the air and make sure that we don't drop one. And we have to do this over a sustained period of time.
From the federal government's perspective, this doesn't mean necessarily doing a lot of new things, this means bringing into alignment things we already do and making sure that they're aligned with this goal.
For example, innovation, funding research has been a long-standing federal role for the United States for a long time. It plays a critical role in our public well being—in energy, in health care, in defense, in aerospace—and will continue to do so. But we need to make sure that those investments we make on research and development are also done in a way that allow for the maximum innovative benefit and commercialization to take place, something Lori talked about in her opening remarks.
The United States will benefit from federal policies that encourage innovation and foster manufacturing competitiveness. And this is something broadly support by the American public with something like 85 percent of Americans believing that manufacturing is essential to our standard of living and to our national security.
It's also the way we grow our way out of deficit problems. Consider the estimate from the Congresssional Budget Office that a 0.1 percent increase in GDP produces a cumulative deficit reduction of $63 billion over five years. Innovating and growing is one of the surest ways to increase our GDP and reduce our budget deficit in the long term.
The government also provides a number of services that address key public benefits—things that because of the inability of a market to provide them, whether because of the spillover effects in research and development or because of the long-term planning, are essential to provide. And this includes things like promoting education, R&D spending, protecting intellectual property, ensuring fair and equitable trade, providing market protection. Again, these are all activities that exist today, but they are things that need to be brought into alignment to support this important sector of the economy.
And Jason talked about this in his remarks as well, where the president has talked about addressing things like tax policy, making a permanent R&D tax and looking at corporate tax reform as an essential part of setting the conditions for which this important and critical sector of our economy can thrive.
We have this interesting problem that we have action in a broad set of categories and we have to maintain them all. It's one of the reasons why Gene Sperling and Becky Blank, the acting Secretary of Commerce, have worked at the cabinet level through this Office of Manufacturing Policy so that they have a forum for looking and making sure that the policy approach is consistent with the president's goals.
The breadth of the problem also means that it's not a federal problem alone. In fact, more than anything else, what we've learned from manufacturing in our discussions with manufacturing is that this is, in the broadest sense, a public-private endeavor. The federal government of the United States doesn't make anything, the private sector does. And in fact, the full benefits will only be realized if we find ways to address the important middle. There cannot be enormous mismatch or high friction between where the government's activities are occurring and where industry's activities are occurring.
And that's why there's been so much focus on promoting entrepreneurship, tech transfer, research and development, and supporting exports.
Let me finish with a few thoughts about what this has meant for federal agencies like my own at NIST.
The focus on manufacturing innovation has touched every aspect of my agency. With the mission to support industrial innovation and competitiveness through measurement science and standards, we have made incredible changes in our program to support standards-setting by industry. The United States is one of the few countries that doesn't have government-written standards; we depend on industry-led standards. And so we've accelerated our efforts to promote rapid industrial standards setting, as it makes sense.
We've also revamped our efforts in measurement science, in particular, to address those areas of emerging technology where we stand to see the biggest gains—areas like nanotechnology, biotechnology, information technology.
And, our Manufacturing Extension Partnership program, which works in all 50 states, including here in Ohio with Ohio MEP. This is a public-private partnership to work with small and midsized manufacturers to ensure that they have the tools they need to be successful and competitive in this global environment.
Finally, in the context of this specific workshop, let me leave you a few thoughts.
In all of the things that are happening in the federal sector—increasing R&D expenditures, looking at new programs, trying to create alignment across all of these programs—the National Network for Manufacturing Innovation stands out for me because it really, almost more than anything else, addresses this critical need in the middle. This program came out of a belief that the United States has a gap in its research infrastructure. While we do exceedingly well at the basic research that's done by our nation's universities and our national labs, largely with public funding, and while our companies do extraordinary work developing new products and services with private funding, the seam between these two worlds has, in fact, gotten much bigger. And the NNMI is an attempt to bridge that gap, to create a shared, research infrastructure where work that occurs between the basic research and the development world—this pre-competitive industrial commons that is so essential to harnessing the ingenuity of our research efforts and turning it into products and services—is something that we need to foster and create. It's something we have heard from every regional manufacturing activity and discussion that we've had.
And so I believe that what we are here to talk about today is really at the heart of what we are trying to do. And I have a few thoughts on what I would like to see your brainstorming discussion today address. And I'm sure you're going to hear more of this from Mike Molnar.
This is a missing capability. And so I would like to hear from you what this capability has to be to make it work.
It's a tie-point. For these manufacturing institutes to realize their full potential, they have to sit at this gap between public-funded and private-funded activity. From a realm where knowledge is general and to be shared openly into a realm where information and knowledge is to be protected in its intellectual property and core to commercial success. These institutes are going to operate in the middle zone between these two different worlds.
It's going to touch on our capacity to educate. These institutes are going to be full of talented people doing critical work. How do we harness and leverage that work? And they're going to be located in regions, and these institutes, I believe, can play a central role in harnessing the power of regional manufacturing strategies.
So, some of the things I would really like to hear from this workshop today are questions about scale. These institutes, from my perspective, need to create what the emergency response community calls a "tipping in" moment. It's a well-known phenomenon from FEMA and others that if there's a natural disaster, one of two things typically happens: either the community tips in, and everybody, despite the disaster, reaches in and rolls up their sleeves and rejuvenates the community, or there's a tipping out where you've lost critical mass and people leave the area.
These institutes need to create a tipping-in moment where companies want to be nearby, where you don't want to be left out of working with the institutes because of this enormous capability that they have.
I'd like to hear about focus. This is research infrastructure, and I believe part of that tipping in, my belief is, likely comes from creating a concentration of talent and capability that doesn't exist anywhere else. And I'd like to hear your thoughts about how you create that focus, that compelling driver.
These institutes have to operate in the public-private gap, and in fact, have a requirement that they not have permanent, federal funding. How do you create the leverage? How do these institutes drive co-investment by companies, and how does this become a sustainable business model?
How do you leverage the tremendous knowledge that is going to be generated out of these institutes by the participating companies? And how do we do this in an arena that touches both funding participation, physical participation by employees and staff from the different participants, and also the intellectual participation, perhaps in IP policy and so forth.
How do we promote private-sector investment, and in particular, how do we create an environment where this enormous diversity of participation can occur—where the shoulder rubbing between faculty from a university that may have grant funding from the National Science Foundation, from NASA, or from DOE, are working right alongside industrial scientists from small or large companies who are working on a challenge that is central to their company's future? If this happened automatically, I think that we would be seeing much more of it. I think that we have to create the conditions where this type of interaction can occur.
And really, the purpose of this workshop is really to put you in the driver's seat of creating this blueprint for these institutes. And we are very much looking forward to your input as we continue to do this.
So, I want to thank you, once again, for joining us, and for attending this workshop. Thank you.